Corporate veil can be lifted in deposit fraud cases to protect depositors and secure assets

Persistent default in repayment of matured public deposits by an NBFC, coupled with diversion of funds and asset holdings in the names of the company and its promoters, was treated as a serious fraud on depositors. The Court held that criminal prosecution alone would not secure restitution and applied the principle that the corporate veil may be lifted where the corporate form is used to perpetrate illegality. It therefore cancelled interim police protection and directed constitution of a special cell, CBCID investigation, seizure and preservation of properties, restraint on alienation, and initiation of winding up proceedings to protect depositors and facilitate recovery.

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Issues: Whether the Court should grant relief to a non-banking financial company that had collected public deposits, failed to repay matured deposits, and sought protection from police action, and whether directions could be issued to secure depositors by tracing and seizing assets, initiating investigation, and pursuing winding up.

Analysis: The materials showed persistent default in repayment of matured deposits, non-compliance with earlier directions, diversion of funds, acquisition of properties in the names of the company and its promoters, and refusal of registration by the Reserve Bank of India under the statutory regime governing non-banking financial institutions. The Court treated the transactions as a serious fraud on depositors, held that mere criminal prosecution would not provide restitution, and applied the principle that the corporate veil may be lifted where the corporate form is used to perpetrate illegality. On that basis, it directed constitution of a special cell, investigation by the CBCID, seizure and preservation of properties, restraint on alienation, cancellation of interim police protection, and initiation of winding up proceedings.

Conclusion: The writ petition was not accepted as a claim for protection; instead, the Court issued coercive and restorative directions against the petitioners to protect the interests of depositors and to facilitate investigation and winding up.

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